Government Eyes Executive Trading Plans in Wake of Press and Investor Pressure
Corporate insiders often buy and sell an issuer’s securities under “10b5-1” trading plans to guard against insider-trading allegations. But these plans have come under heightened scrutiny in 2013. The Securities and Exchange Commission (“SEC”) is “looking into” allegations by the Council of Institutional Investors (“CII”) that corporate insiders have been abusing these plans. And a Wall Street Journal article on potentially improper trading at public companies prompted federal officials to issue subpoenas mere days after the article’s publication.
Enacted in 2000 to clarify the meaning of “insider trading,” SEC Rule 10b5-1 prohibits trading “on the basis of” material nonpublic information about a security or issuer in breach of fiduciary duties. But the rule also gives company insiders affirmative defenses to insider-trading charges, including the “10b5-1 plan” defense: First, the insiders must have established the written plan before learning the material nonpublic information. Second, the 10b5-1 plan must either (1) specify the quantity, date, and price of the trades; (2) include a formula for arriving at these figures; or (3) not permit the insider to have any influence over the trades (provided that whoever does exercise that influence does not know the material nonpublic information).
On April 25, 2013 The Wall Street Journal published an article highlighting directors’ increasing use of 10b5-1 plans to sell heavily in a short period, sometimes in investment funds they run. In one instance, a director at Tesla Motors Inc. set up a 10b5-1 plan at the private equity fund he runs in November 2011. In February 2012, a Tesla investor told Tesla that he planned to sell a large amount of Tesla stock. In March, the director sold $31 million of Tesla stock over the course of eleven days. Tesla’s stock sank when the investor sold $100 million in Tesla stock in early April. The article gave other examples of suspicious trading, including directors amending existing trading plans without explanation shortly before issuers released information that jolted their stock price.
On April 30, the Journal reported that the U.S. Attorney’s Office for the Eastern District of New York had issued subpoenas requesting information from the companies and funds cited by the April 25 article. That article also apparently prompted the CII to send its second letter to the SEC on May 9, 2013, criticizing Rule 10b5-1. The CII, which represents large pension funds, believes that the current rule permits many company insiders to adopt practices inconsistent with the rule’s spirit, if not its letter. The CII urges the SEC to curb these practices by putting in place new 10b5-1 restrictions. For example, CII argues, there should be a mandatory three month or more delay between putting a 10b5-1 plan in place and making the first trade. In addition, the SEC should restrict the number of modifications or cancellations that insiders can make to these plans—and insiders should have to disclose these changes. CII also proposes that company boards should have to adopt policies for and monitor 10b5-1 plans.
The SEC has not indicated that it intends to amend Rule 10b5-1.But given the government’s recent scrutiny, corporations should consider revisiting and reviewing their Rule 10b5-1 plans and policies.